U-turn from policy makers on home prices could bring whiplash

From the start of the year to the fourth quarter, China’s housing-market policies saw a U-turn as the monetary loosening policy to ease the country’s massive housing glut has given way to an unprecedented tightening, targeting an “asset price bubble”. But as the curtain falls on the year, critics pose one question: Is all the haste necessary?

“The ‘destocking’ priority, set up in late 2015, was meant to ease the housing oversupply in third- and fourth-tier cities but ended up pushing up the home prices in first- and second-tier cities, with the inventory in lower-tier cities little cut,” Chinese Academy of Social Sciences researcher Ni Pengfei said.

Shanghai’s November new-home prices fall for first time in 21 months as control measures bite

In early February, the People’s Bank of China lowered the down-payment limit for first-time buyers for the second time in five months - from 25 per cent to 20 per cent. The move was heralded at that time as a measure to cut inventory, part of President Xi Jinping’s “supply-side reform”. Eight months later, 16 cities were forced to impose higher down-payment requirement to avoid runaway prices there going out of control.

Excess liquidity, after five consecutive cuts in benchmark interest rates, along with local authorities’ raising of housing provident fund loans quotas, have driven homebuyers to the first- and second-tier cities, and the one-way bet of a home-price surge there encouraged rampant speculators - aided by various forms of shadow banking. These factors, along with tight land supply in key cities that was described by some critics as a “hunger game”, created an unprecedented market rally that is reminiscent of the stock market bull run in 2015.

In August, at the height of the rally, the coastal city of Xiamen saw prices jump 44.3 per cent year on year. Hefei, Nanjing, Shanghai and Shenzhen also recorded strong home-price inflation, according to the National Bureau of Statistics. In that month, developers splashed headlines almost every day with record land-auction prices. Those signals, in turn, unnerved ordinary homebuyers. Couples in Shanghai flocked to register for divorce so they could buy another home as “first-time” home buyers.

Then the music stopped. Starting from September 30 with Beijing, about 20 cities have imposed stricter home-purchase rules in droves, in a dramatic policy reversal that is in concert with top leaders’ call to “battle the asset bubble”. A leaked document showed that provincial and municipal officials were summoned to Beijing for an urgent meeting. They were told that “rein in price” was not just an economic issue but also a “political one”. They would be held accountable if home prices in their jurisdiction failed to fall.

Expect Beijing to focus on avoiding asset bubbles, analysts say

Under heightened pressures, various heavy-handed methods were used to clamp down, ranging from suspending pre-sale permits for homes that governments deemed too expensive, to checking money inflow to the property sector, raids on “illegal” marketing and sales tactics, to muzzling social media for spreading housing-related “rumours”.

The market quickly cooled off. By last month only seven out of the 15 cities closely monitored by the government saw month-on-month price rises, compared with 13 in October. That said, many doubt these administrative moves can be sustained.

Property and related industries accounted for nearly one-fifth of China’s gross domestic product, while land-sale revenue accounted for about 40 per cent of local governments’ coffers. Further cooling in sales and investment put overall economic growth at risk.

Ni said this explained why, during the rally, governments in first-tier cities stayed on the sidelines when speculators took advantage of the shadow-banking system to add leverage, despite Beijing making it clear from the outset that “destocking” measures did not apply to first-tier cities. As much as 5.5 trillion yuan (HK$6.14 trillion) flowed into developers’ pockets this year to help them acquire land, China International Capital Corp estimated.

China Vanke chairman Wang Shi said he had long been in the camp of “government control”. “Why can’t [we have price regulation]? China is neither a command economy nor a market economy,” he told a recent forum. “My concern, however, is whether the controls can last.”

Most economists are not on the “government control” camp though. They said the current measures failed to tackle the root causes of runaway prices in biggest cities, including a severe land shortage, absence of property taxes and a mature lease market.

JPMorgan Chase chief China economist Zhu Haibin suggested China’s huge existing homes were vastly under-utilised, thus the government should introduce measures to support an efficient lease market. He suggested pension funds and life insurance funds be encouraged to invest in existing homes for rental purposes.

Signs emerged that the top authority might have reflected the flaws of the clampdowns, which is why the Communist Party’s year-end economic work conference said a “long-acting mechanism” for the healthy development of the real-estate industry was needed.

The statement hinted at various measures, such as increasingly land supply in cities facing “upward price pressure”, especially raising the portion of residential supply. Land supply should be linked with population.

China Real Estate Chamber of Commerce head Zhong Bin said: “Without fundamental reforms in financial, fiscal and land fronts, the ‘government control’ would only repeat its tight-and-loose cycle.”